NOTE 3. RESTRUCTURING
Our restructuring liabilities consist of estimated ongoing costs related to long-term operating lease obligations, which the Company has exited. The recorded value of the ongoing lease obligations is based on the remaining lease term and payment amount, discounted to present value. Changes in subsequent periods resulting from a revision to either the timing or the
amount of estimated cash flows over the future period are measured using the credit adjusted, risk free rate that was used to measure the restructuring liabilities initially. Please also refer to Note 6, “Leases” as certain amounts formerly included below in the restructuring reserve as of December 31, 2018, have been reclassified on the balance sheet to be shown netted against the restructured lease, right-of-use asset in accordance with Topic 842..
The following is a reconciliation of the beginning and ending balances of our restructuring liability as it relates to the 2017 and 2019 restructuring planplans (in thousands):
The following is a reconciliation of the ending balance of our restructuring liability at June 30, 2019March 31, 2020 to the balance sheet:
As a result of the restructuring actions and initiatives described above, we have reduced our operating expenses to be more commensurate with our sales volumes, however,volumes. However, we continue to incur losses and have a substantial accumulated deficit, and
substantial doubt about our ability to continue as a going concern continues to exist at June 30, 2019.March 31, 2020.
Since the executive transition on April 1, 2019, we have continued to evaluate and assess strategic options as we seek to achieve a profitable business model and maximize value for our stockholders. Our plansprofitability. We plan to achieve profitability includethrough growing our sales by continuing to develop new technologies into sustainable product linesexecute on our multi-channel sales strategy that allow us to effectively compete to expand our customer base, executetargets key verticals such as government, healthcare, education and commercial and industrial, complemented by our marketing outreach campaigns, channel partnerships, and additional sales plans, evaluatefrom a new e-commerce platform, which we plan to launch in the second quarter of 2020. We also plan to continue to develop advanced lighting and lighting control technologies and introduce impactful new products such as the EnFocus™, a breakthrough lighting control platform we officially launched during the second quarter of 2020. In addition, we continue to apply rigorous and financial disciplines in our optimal organizational structure, business processes and continue to improve ourpolicies, and supply chain practices to help accelerate our path towards profitability.
There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining additional funding contains risks, including:
If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.
NOTE 4. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates actual cost determined using the first-in, first-out cost method) or net realizable value, and consist of the following (in thousands):
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets and consist of the following (in thousands):
NOTE 6. LEASES
The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2024 under which it is responsible for related maintenance, taxes and insurance. The Company has one finance lease containing a bargain purchase option upon expiration of the lease in 2022. The lease term consists of the non-cancellable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the
option. The present value of the remaining lease obligation for these leases was calculated using an incremental borrowing rate (“IBR”) of 7.25%, which was the Company’s borrowing rate on theits revolving credit agreement signed on December 11, 2018. The weighted average remaining lease term for operating, restructuring and finance leases is three2.3 years, two1.3 years, and three2.0 years, respectively.
|
| | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2019 | | 2019 |
| | | | |
Operating lease cost | | | | |
Sublease income | | $ | (25 | ) | | $ | (50 | ) |
Lease cost | | 171 |
| | 318 |
|
Operating lease cost, net | | 146 |
| | 268 |
|
| | | | |
Restructured lease cost | | | | |
Sublease income | | (111 | ) | | (223 | ) |
Lease cost | | 107 |
| | 216 |
|
Restructured lease cost, net | | (4 | ) | | (7 | ) |
| | | | |
Finance lease cost | | | | |
Interest on lease liabilities | | 1 |
| | 1 |
|
Finance lease cost, net | | 1 |
| | 1 |
|
| | | | |
Total lease cost, net | | $ | 143 |
| | $ | 262 |
|
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019March 31, 2020
(Unaudited)
Components of the operating, restructured and finance lease costs recognized in net loss for the three months ended March 31, 2020 and 2019, were as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, | | |
| | | 2020 | | 2019 |
Operating lease cost (income): | | | | | |
Sublease income | | | $ | (25) | | | $ | (25) | |
Lease cost | | | 152 | | | 147 | |
Operating lease cost, net | | | 127 | | | 122 | |
| | | | | |
Restructured lease cost (income): | | | | | |
Sublease income | | | (68) | | | (112) | |
Lease cost | | | 61 | | | 109 | |
Restructured lease cost, net | | | (7) | | | (3) | |
| | | | | |
Finance lease cost | | | | | |
Interest of lease liabilities | | | — | | | 1 | |
Finance lease cost, net | | | — | | | 1 | |
| | | | | |
Total lease cost, net | | | $ | 120 | | | $ | 120 | |
| | | | | |
Supplemental balance sheet information related to the Company’s operating and finance leases as of June 30,March 31, 2020 and December 31, 2019 are as follows (in thousands):
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Operating Leases | | | |
Operating lease right-of-use assets | $ | 1,179 | | | $ | 1,289 | |
Restructured lease right-of-use assets | 268 | | | 322 | |
Operating lease right-of-use assets, total | 1,447 | | | 1,611 | |
| | | |
Operating lease liabilities | 1,337 | | | 1,480 | |
Restructured lease liabilities | 410 | | | 488 | |
Operating lease liabilities, total | 1,747 | | | 1,968 | |
| | | |
Finance Leases | | | |
Property and equipment | 13 | | | 13 | |
Allowances for depreciation | (7) | | | (5) | |
Finance lease assets, net | 6 | | | 8 | |
| | | |
Finance lease liabilities | 6 | | | 6 | |
Total finance lease liabilities | $ | 6 | | | $ | 6 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| | | | | |
| | | June 30, |
| | | 2019 |
| | | |
Operating Leases | | | |
Operating lease right-of-use assets | | | $ | 1,541 |
|
Restructured lease right-of-use assets | | | 469 |
|
Operating lease right-of-use assets, total | | | 2,010 |
|
| | | |
Operating lease liabilities | | | 1,741 |
|
Restructured lease liabilities | | | 688 |
|
Operating lease liabilities, total | | | 2,429 |
|
| | | |
Finance Leases | | | |
Property and equipment | | | 13 |
|
Allowances for depreciation | | | (5 | ) |
Finance lease assets, net | | | 8 |
|
| | | |
Finance lease liabilities | | | 8 |
|
Total finance lease liabilities | | | $ | 8 |
|
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
Future minimum lease payments required under operating, restructured and finance leases for each of the 12-month rolling periods below in effect at June 30, 2019March 31, 2020 are as follows:follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Operating Leases | Restructured Leases | Restructured Leases Sublease Payments | Finance Lease |
April 2020 to March 2021 | | $ | 621 | | $ | 342 | | $ | (273) | | $ | 3 | |
April 2021 to March 2022 | | 644 | | 86 | | (68) | | 3 | |
April 2022 to March 2023 | | 172 | | — | | — | | — | |
April 2023 to March 2024 | | 13 | | — | | — | | — | |
| | | | | |
Total future undiscounted lease payments | | 1,450 | | 428 | | (341) | | 6 | |
Less imputed interest | | (113) | | (18) | | 14 | | — | |
Total lease obligations | | $ | 1,337 | | $ | 410 | | $ | (327) | | $ | 6 | |
|
| | | | | | | | | | | | | | | |
| | | Operating Leases | Restructured Leases | Restructured Leases Sublease Payments | | Finance Lease |
July 2019 to June 2020 | | | $ | 637 |
| $ | 391 |
| $ | (316 | ) | | 3 |
|
July 2020 to June 2021 | | | 637 |
| 342 |
| (273 | ) | | 3 |
|
July 2021 to June 2022 | | | 637 |
| — |
| — |
| | 2 |
|
July 2022 to June 2023 | | | 15 |
| — |
| — |
| | — |
|
July 2023 to June 2024 | | | 9 |
| — |
| — |
| | — |
|
Total future undiscounted lease payments | | | 1,935 |
| 733 |
| (589 | ) |
| 8 |
|
Less imputed interest | | | (194 | ) | (45 | ) | 36 |
| | — |
|
Total lease obligations | | | $ | 1,741 |
| $ | 688 |
| $ | (553 | ) | | $ | 8 |
|
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
Supplemental cash flow information related to leases for the sixthree months ended June 30,March 31, 2020 and 2019, was as follows (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, | | |
| 2020 | | 2019 |
Supplemental cash flow information | | | |
Cash paid, net, for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 135 | | | $ | 122 | |
Operating cash flows from restructured leases | $ | 17 | | | $ | (3) | |
Financing cash flows from finance leases | $ | 1 | | | $ | 1 | |
|
| | | | | |
| | | Six months ended June 30, |
| | | 2019 |
Supplemental cash flow information | | | |
Cash paid, net, for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | | | $ | 268 |
|
Operating cash flows from restructured leases | | | $ | 47 |
|
Financing cash flows from finance leases | | | $ | 1 |
|
NOTE 7. DEBT
Credit facilityfacilities
As of June 30, 2019, borrowingsBorrowings under ourthe Company’s revolving line of credit (“Credit Facility”) with Austin Financial Serviceswere $1.7$0.8 million at March 31, 2020 and $0.7 million at December 31, 2019 and are recorded in the Condensed Consolidated Balance Sheets as a current liability under the caption, “Credit line borrowings.” Unamortized debtOutstanding balances include unamortized net issuance costs related to thetotaling $0.1 million for March 31, 2020 and December 31, 2019, respectively.
The Credit Facility were $0.1 millionis secured by a lien on our assets. Interest on advances under the line is due monthly at June 30, 2019. These costs are recordedthe “Prime Rate,” as current and long-term assets onpublished by the Condensed Consolidated Balance Sheets and have not been netted against the liability dueWall Street Journal from time to immateriality.time, plus a margin of 2%. The borrowing rate as of June 30,March 31, 2020 and December 31, 2019 was 7.50%. At June 30, 2019, we had $0.35.25% and 6.75%, respectively. Overdrafts are subject to a 2% fee. Additionally, an annual facility fee of 1% on the entire $5.0 million available for us to borrow underamount of the Credit Facility. Additional information regarding our Credit Facility is includeddue at the beginning of each of the three years and a 0.5% collateral management fee on the average outstanding loan balance is payable monthly. We paid Austin the first year’s fee when the Credit Facility was signed and the second year’s fee in December of 2019. Refer to Note 9 “Debt” toincluded under Item 8 of our 20182019 Annual Report which was filed with the SEC on April 1, 2019.Report.
DebtConvertible Notes
On March 29, 2019, the Company entered into a Note Purchase Agreement with Fusion Park LLC, F&S Electronic Technology (HK) Co., Ltd, Brilliant Start Enterprise Inc., Vittorio Viarengo and Amaury Furmin (collectively the “Investors”) for the purchase of an aggregatewe raised $1.7 million (before transaction expenses) from the issuance of $1.7 million in principal amount of subordinated convertible promissory notes to certain investors (the “Notes”“Convertible Notes”). The Convertible Notes which were issued to the Investors on March 29, 2019 and amended on May 29, 2019, havehad a maturity date of December 31, 2021 and bearbore interest at a rate of 5 percent5% per annum until June 30, 2019 and at a rate of 10 percent10% thereafter. The outstandingPursuant to their terms, on January 16, 2020 following approval by our stockholders of certain amendments to our certificate of incorporation, the principal amount of each Note, together with accruedall of the Convertible Notes,the accumulated interest (such principalthereon ($0.1 million) and interest,unamortized issuance costs at the “Aggregate Outstanding Amount”)date of conversion ($0.04 million), is convertiblewhich totaled $1.8 million converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of Series A Preferred Stock at a “Conversion Rate” determined by the arithmetic average of the volume-weighted average closing price of the Common Stock measured over a specified ten-trading-day period that ended on April 16, 2019, which equaled $0.67 per share. To calculate the number of shares of Series A Preferred Stock into which each Note may convert, the Aggregate Outstanding Amount of such Note will be divided by the Conversion Rate.
The Notes will automatically convert into shares of Series A Preferred Stock at the conversion rate on the first business day following the date that the Company’s stockholders approve the transactions contemplated by the Notes, including (a) the issuance of shares of Common Stock upon conversion of the shares of Series A Preferred Stock in excess of the number of shares of Common Stock permitted by NASDAQ Marketplace Rules, and (b) the increase in the number of authorized and available shares of Series A Preferred Stock pursuant to the Company’s Certificate of Incorporation, as amended.
The Company has accounted for this equity-linked hybrid instrument in accordance with applicable U.S. GAAP and, per analysis of the terms of the agreement, has determined it to be a debt-related instrument that does not require the equity-linked component to be bifurcated. The Company has recorded the Notes as short-term debt at cost in the amount of $1.7 million, as we expect the Notes to convert in less than 12 months. The issuance costs will be deferred and amortized until such time as the Notes convert. Unamortized debt issuance costs were $60 thousand at June 30, 2019. These costs are recorded as current and long-term assets on the Consolidated Balance Sheets and have not been netted against the liability due to immateriality.
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019March 31, 2020
(Unaudited)
Convertible Preferred Stock, par value $0.0001 per share (“Series A Preferred Stock”), which is convertible on a one-for-one basis into shares of our common stock.
The purchase agreement related to the Convertible Notes contain customary representations and warranties and provide for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock. Please also refer to Note 9, “Stockholder’s Equity”.
Iliad Note
On November 25, 2019, we entered into a note purchase agreement (“the Iliad Note Purchase Agreement”) with Iliad Research and Trading, L.P. (“Iliad”) pursuant to which the Company sold and issued to Iliad a promissory note in the principal amount of approximately $1.3 million (“Iliad Note”). The Iliad Note was issued with an original issue discount of $142 thousand and Iliad paid a purchase price of $1.1 million for the issuance of the Iliad Note, after deduction of $15 thousand of Iliad transaction expenses.
The Iliad Note has a maturity date of November 24, 2021 and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the Iliad Note at a premium, which is 15% during the first year and 10% during the second year. Beginning in May 2020, Iliad may require the Company to redeem up to $150 thousand of the Iliad Note in any calendar month. The Company has the right on three occasions to defer all redemptions that Iliad could otherwise require the Company to make during any calendar month. Each exercise of this deferral right by the Company will increase the amount outstanding under the Iliad Note by 1.5%.
The total liability for the Iliad Note Purchase Agreement, net of discount and financing fees, was $0.9 million at March 31, 2020 and $1.0 million at December 31, 2019. Unamortized loan discount and debt issuance costs were $0.2 million at March 31, 2020 and December 31, 2019.
In the event our common stock is delisted from NASDAQ, the amount outstanding under the Iliad Note will automatically increase by 15% as of the date of such delisting.
Pursuant to the Iliad Note Purchase Agreement and the Iliad Note, we have, among other things, agreed that, until the Iliad Note is repaid:
•10% of gross proceeds the Company receives from the sale of our common stock or other equity must be paid to Iliad and will be applied to reduce the outstanding balance of the Iliad Note (the failure to make such a prepayment is not an event of default under the Iliad Note, but will increase the amount then outstanding under the Iliad Note by 10%); and
•unless agreed to by Iliad, we will not engage in certain financings that involve the issuance of securities that include a conversion rights in which the number of shares of common stock that may be issued pursuant to such conversion right varies with the market price of our common stock (a “Restricted Issuance”); provided, however, if Iliad does not agree to a Restricted Issuance, the Company may on up to three occasions make the Restricted Issuance anyway, but the outstanding balance of the Iliad Note will increase 3% on each occasion the Company exercises its right to make the Restricted Issuance without Iliad’s agreement.
In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, of which $226 thousand went towards the outstanding principal amount.
Upon the occurrence of an event of default under the Iliad Note, Iliad may accelerate the date for the repayment of the amount outstanding under the Iliad Note and increase the amount outstanding by an amount ranging from 5% to 15%, depending on the nature of the default. Certain insolvency and bankruptcy related events of default will result in the automatic acceleration of the amount outstanding under the Iliad Note and the outstanding amount due will be automatically increased by 5%. After the occurrence of an event of default, Iliad may elect to have interest accrue on the Iliad Note at a rate per annum of 22%, or such lesser rate as permitted under applicable law.
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
NOTE 8. INCOME TAXES
As a result of the operating loss incurred during each of the three and six months ended June 30,March 31, 2020 and 2019, and 2018, and after the application of the annual limitation set forth under Section 382 of the Internal Revenue Code (“IRC”), it was not necessary to record a provision for U.S. federal income tax or various states income taxes.
At June 30, 2019March 31, 2020 and December 31, 2018,2019, we had a full valuation allowance recorded against our deferred tax assets.
The valuation allowance was recorded due to uncertainties related to our ability to realize the deferred tax assets, primarily consisting of certain net operating loss carry-forwards. The valuation allowance is based on management’s estimates of taxable income by jurisdiction and the periods over which the deferred tax assets will be recoverable.
At December 31, 2018,2019, we had a net operating loss carry-forward of approximately $100.5$108.8 million for U.S. federal income tax purposes ($64.5 million for state and local income tax purposes.purposes). However, due to changes in our capital structure, approximately $46.0$54.5 million of the net operating loss carry-forward$108.8 million is available to offset future taxable income, and after the application of the limitations found underIRC Section 382 limitations. As a result of the IRC, we expectTax Cuts and Jobs Act of 2017 (“Act”), net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income and can be carried forward indefinitely. The $8.3 million and $8.7 million in net operating losses generated in 2019 and 2018 will be subject to have approximately $46.0 million of this amount available for use in 2019.the new limitations under the Act. If not used, theseutilized, the carry-forwards generated prior to December 31, 2017 of $37.3 million will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes. For a full discussion of the estimated restrictions on our utilization of net operating loss carry-forwards, please refer to Note 12, “Income Taxes,” included under Item 8 of our 20182019 Annual Report.
NOTE 9.STOCKHOLDERS’ EQUITY
Preferred Stock
Pursuant to the terms of the Convertible Notes, on January 16, 2020 following approval by our stockholders of certain amendments to our certificate of incorporation, the principal amount of all of the Convertible Notes and the accumulated interest thereon in the amount of $1.8 million converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share, which is convertible on a one-for-one basis into shares of our common stock.
The Series A Preferred Stock was created by the filing of a Certificate of Designation with the Secretary of State of the State of Delaware on March 29, 2019, which authorized 2,000,000 shares of Series A Preferred Stock (“Original Series A Certificate of Designation”). The Original Series A Certificate of Designation was amended on January 15, 2020 following stockholder approval to increase the number of authorized shares of Series A Preferred Stock to 5,000,000 (the Original Series A Certificate of Designation as so amended, the “Series A Certificate of Designation”). Of the 5,000,000 Series A Preferred Stock, 3,300,000 shares were further designated as Series A Convertible Preferred Stock.
Pursuant to the Series A Certificate of Designation, each holder of outstanding shares of Series A Preferred Stock is entitled to vote with holders of outstanding shares of common stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company for their action or consideration, except as provided by law. In any such vote, each share of Series A Preferred Stock shall be entitled to a number of votes equal to 55.37% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.
The Series A Preferred Stock (a) has a preference upon liquidation equal to $0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-one basis. We also filed a Certificate of Elimination with respect to its authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of preferred stock available for designation as the Series A Preferred Stock.
The purchase agreement related to the Convertible Notes contain customary representations and warranties and provide for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock.
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
January 2020 Equity Offering
Issuance of Common Stock and Warrants
In January 2020, we completed a registered direct offering for the sale of 3,441,803 shares of our common stock to certain institutional investors, at a purchase price of $0.674 per share. We also sold, to the same institutional investors, warrants to purchase up to 3,441,803 shares of common stock at an exercise price of $0.674 per share in a concurrent private placement for a purchase price of $0.125 per warrant. We paid the placement agent commissions of $193 thousand plus $50 thousand in expenses in connection with the registered direct offering and the concurrent private placement and we also paid legal, accounting and other fees of $231 thousand related to the offering. Total offering costs of $474 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity. In addition, we issued warrants to the placement agent to purchase up to 240,926 shares of common stock at an exercise price of $0.9988 per share. Net proceeds to us from the sale of common stock and warrants were approximately $2.3 million. In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, of which $226 thousand went towards the outstanding principal amount.
As of March 31, 2020, we had the following outstanding non-tradeable, registered warrants to purchase shares of common stock:
| | | | | | | | | | | | | | | | | |
| Number of Underlying Shares | | Exercise Price | | Expiration |
Investor Warrants | 3,441,803 | | $0.6740 | | January 13, 2025 |
Placement Agent Warrants | 240,926 | | $0.9988 | | January 13, 2025 |
| 3,682,729 | | | | |
Warrant Liabilities
We account for common stock warrants as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Common stock warrants that could require cash settlement are accounted for as liabilities. We classify these warrant liabilities on the consolidated balance sheet as a current liability. The warrant liabilities are revalued at fair value at each balance sheet date subsequent to the initial issuance. Changes in the fair market value of the warrant are reflected in the consolidated statement of operations as income (expense) based upon the change in fair value of warrants.
The warrants we issued in the January 2020 registered direct offerings contain a provision for a cash payment in the event that the shares are not delivered to the holder within two trading days. The cash payment equals $10 per day per $1,000 of warrant shares for each day late. The warrants issued in the January 2020 private placement also contain a provision for net cash settlement in the event that there is a fundamental transaction (e.g., merger, sale of substantially all assets, tender offer, or share exchange). If a fundamental transaction occurs in which the consideration issued consists of all cash or stock in a non-public company, then the warrant holder has the option to receive cash equal to a Black-Scholes value of the remaining unexercised portion of the warrant.
The warrants have been classified as liabilities, as opposed to equity, due to the potential adjustment to the exercise price that could result upon late delivery of the shares or potential cash settlement upon the occurrence of certain events as described above, and are recorded at their fair values at each balance sheet date.
Stock-based compensation
Stock-based compensation expense is attributable to stock options and restricted stock unit awards. For all stock-based awards, we recognize expense using a straight-line amortization method.
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
The following table summarizes stock-based compensation expense (income) and the impact it had on operations for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Cost of sales | $ | 1 | | | $ | 7 | | | | | |
Product development | 1 | | | 28 | | | | | |
Selling, general, and administrative | 18 | | | 508 | | | | | |
Total stock-based compensation | $ | 20 | | | $ | 543 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Cost of sales | $ | — |
| | $ | 10 |
| | $ | 7 |
| | $ | 19 |
|
Product development | (6 | ) | | 30 |
| | 22 |
| | 55 |
|
Selling, general, and administrative | (14 | ) | | 195 |
| | 494 |
| | 356 |
|
Total stock-based compensation | $ | (20 | ) | | $ | 235 |
| | $ | 523 |
| | $ | 430 |
|
Total unearned stock-based compensation was $0.1$0.2 million at June 30, 2019,March 31, 2020, compared to $1.3$0.4 million at June 30, 2018.March 31, 2019. These costs will be charged to expense and amortized on a straight-line basis in future periods. The weighted average period over which the unearned compensation at June 30, 2019March 31, 2020 is expected to be recognized is approximately 1.32.7 years.
Pursuant to agreements dated March 29, 2019, and effective April 1, 2019, Theodore L. Tewksbury III resigned as Chairman of the Board, Chief Executive Officer and President, and Jerry Turin resigned as Chief Financial Officer and Secretary. In accordance with their separation agreements, Theodore Tewksbury’s outstanding restricted stock units vested immediately and one-third of Jerry Turin’s outstanding restricted stock units vested immediately. Any stock options vested for Theodore Tewskbury as of April 1, 2019, shall remain exercisable for one year following. All unvested stock options were cancelled. The impact of the accelerated vesting of the restricted stock units and cancellation of the stock options was recognized during the three months ended March 31, 2019 and totaled $0.3 million.
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
Stock options
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. Estimates utilized in the calculation include the expected life of the option, risk-free interest rate, and expected volatility, and are further comparatively detailed as follows:
| | | | | | | | | | | |
| Three months ended March 31, | | |
| 2020 | | 2019 |
Fair value of options issued | $ | 0.22 | | | $ | — | |
Exercise price | $ | 0.30 | | | $ | — | |
Expected life of options (in years) | 6.1 | | 0 |
Risk-free interest rate | 0.7 | % | | — | % |
Expected volatility | 92.8 | % | | — | % |
Dividend yield | 0.0 | % | | 0.0 | % |
|
| | | | | | | |
| Six months ended June 30, |
| 2019 | | 2018 |
Fair value of options issued | $ | — |
| | $ | 1.74 |
|
Exercise price | $ | — |
| | $ | 2.46 |
|
Expected life of options (in years) | — |
| | 5.8 |
|
Risk-free interest rate | — | % | | 2.3 | % |
Expected volatility | — | % | | 84.3 | % |
Dividend yield | 0.0 | % | | 0.0 | % |
A summary of option activity under all plans for the sixthree months ended June 30, 2019March 31, 2020 is presented as follows:
| | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life (in years) |
Balance at December 31, 2019 | 777,153 | | | $ | 1.04 | | | |
Granted | 431,250 | | | 0.30 | | | |
| | | | | |
Canceled/forfeited | (29,800) | | | 0.47 | | | |
Expired | — | | | — | | | |
Balance at March 31, 2020 | 1,178,603 | | | $ | 0.78 | | | 8.0 |
| | | | | |
Vested and expected to vest at March 31, 2020 | 868,008 | | | $ | 0.93 | | | 7.9 |
| | | | | |
Exercisable at March 31, 2020 | 113,353 | | | $ | 4.59 | | | 5.8 |
|
| | | | | | | | |
| Number of Options | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life (in years) |
Balance at December 31, 2018 | 292,871 |
| | $ | 3.78 |
| | |
Canceled/forfeited | (129,896 | ) | | 2.67 |
| | |
Balance at June 30, 2019 | 162,975 |
| | $ | 4.67 |
| | 5.5 |
| | | | | |
Vested and expected to vest at June 30, 2019 | 162,629 |
| | $ | 4.67 |
| | 5.5 |
| | | | | |
Exercisable at June 30, 2019 | 157,701 |
| | $ | 4.72 |
| | 5.5 |
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019March 31, 2020
(Unaudited)
Restricted stock units
A summary of restricted stock unit activity under all plans for the sixthree months ended June 30, 2019March 31, 2020 is presented as follows:
| | | | | | | | | | | | | | | | | |
| Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Life (in years) |
Balance at December 31, 2019 | 33,051 | | | $ | 2.63 | | | |
Granted | 80,000 | | | 0.30 | | | |
Released | | (19,873) | | | 2.72 | | | |
Canceled/forfeited | | — | | | — | | | |
Balance at March 31, 2020 | 93,178 | | | $ | 0.61 | | | 8.7 |
|
| | | | | | | | |
| Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Life (in years) |
Balance at December 31, 2018 | 546,858 |
| | $ | 2.54 |
| | |
Granted | 27,187 |
| | 1.16 |
| | |
Released | (377,894 | ) | | 2.54 |
| | |
Canceled/forfeited | (152,441 | ) | | 2.32 |
| | |
Balance at June 30, 2019 | 43,710 |
| | $ | 2.62 |
| | 1.5 |
NOTE 10.COMMITMENTS AND CONTINGENCIES
We may be the subject of threatened or pending legal actions and contingencies in the normal course of conducting our business. We provide for the costs related to these matters when a loss is probable, and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. For certain types of claims, we maintain insurance coverage for personal injury and property damage, product liability and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.Purchase Commitments
As of June 30, 2019,March 31, 2020, we had approximately $0.9$3.4 million in outstanding purchase commitments for inventory. Of this amount, approximately $0.6$2.5 million is expected to ship in the thirdsecond quarter of 20192020 with the balance expected to ship in the third and fourth quarter of 2019 and the first quarterquarters of 2020.
NOTE 11. SUBSEQUENT EVENTS
On April 17, 2020, the Company was granted a loan from KeyBank National Association in the amount of approximately $795 thousand, pursuant to the Paycheck Protection Program (the “PPP”) under Division A of the Coronavirus Aid, Relief and Economic Securities Act (the "CARES Act"), which was enacted on March 27, 2020. The loan accrues interest at a rate of 1.0% per annum and matures on April 17, 2022. The funds were received on April 20, 2020. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company intends to use the entire loan amount for qualifying expenses, however there is no assurance that the Company will obtain forgiveness for any portion of the loan.
On April 16, 2020, NASDAQ announced that, in response to the COVID-19 pandemic and related extraordinary market conditions, it is providing temporary relief through June 30, 2020 from, among other rules, the $1.00 minimum bid price rule. As a result, Energy Focus has until July 24, 2020 to come into compliance with the $1.00 minimum bid price rule. Energy Focus is evaluating its options to come into compliance, including, in the discretion of its board of directors, effectuating a reverse stock split of its common stock at a ratio of at least 1-for-2 and up to 1-for-20, which discretionary reverse stock split has been approved by Energy Focus’ stockholders, provided it occurs no later than June 17, 2020.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto, included under Item 1 of this Quarterly Report, as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of our 20182019 Annual Report.
Overview
Energy Focus, Inc. and its subsidiary engageengages in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems.systems and controls. We develop, market and sell high quality energy-efficient light-emitting diode (“LED”) lighting products and controls in the commercial and military markets.maritime markets (“MMM”). Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and wellness through advanced LED retrofit solutions. Our goal is to be the retrofitLED lighting technology and market leader for the most demanding applications where performance, quality and health really matter.are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, lamps in general purpose and high-intensity discharge (“HID”) lighting and other types of lamps in low-bay and high-bayinstitutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”) and other LED products.products and controls.
Net sales decreased 36.3 percentincreased 19.1% for the sixthree months ended June 30, 2019March 31, 2020 as compared to the sixthree months ended June 30, 2018,March 31, 2019, primarily driven by a 53.9 percent decrease71.6% increase in military sales period over period. Net sales of our commercial products decreased by 20.5 percent12.5% for the sixthree months ended June 30, 2019March 31, 2020 as compared to the same prior year period. The sale cycles for the military market is dependent on many factors, including the availability of government funding, the timing and fulfillment of U.S. Navy awards, new ship construction, diversion of funds to other government needs, and the timing of vessel maintenance schedules. The sale cycles for our commercial target markets can range from several months to over one year and our financial results reflect volatility from the continued fluctuations in the timing, pace and size of commercial projects for a major healthcare customer.
At June 30, 2019, we had $2.2 millionDespite continuing progress in cash and cash equivalents, which includes $0.3 million restricted cash held, and a total of $3.4 millionthe last four quarters in debt, including approximately $1.7 million in funding from the issuance of subordinated convertible notes. During the first half of 2019, we took additional actions to reducereducing our operating expenses to be more commensurate with our sales volumes. These actions resulted in additional restructuring charges of $0.1 million in thelosses significantly from first quarter of 2019, the Company’s results reflect the challenges due to long and $0.1 millionunpredictable sales cycles, unexpected delays in the second quarter of 2019 for severancecustomer retrofit budgets and related benefits charges in connection with the elimination of twelve positions (three during the first quarter of 2019project starts, continuing aggressive price competition and nine during the second quarter of 2019) and the closing of our offices in San Jose, California and Taipei, Taiwan throughout the first half of 2019. Despite these actions, we continuean intensely competitive lighting industry going through constant change. We continued to incur losses and the fact we have a substantial accumulated deficit, raisingwhich continue to raise substantial doubt about our ability to continue as a going concern at June 30, 2019.March 31, 2020.
SinceIn addition, the executive transitionCOVID-19 outbreak has and may continue to have a significant economic and business impact on April 1, 2019,our Company. In the first quarter we have continuedseen a down-turn in commercial sales as some customers in the healthcare and education industries delayed order placements in reaction to evaluate and assess strategic options as we seek to achieve a profitable business model and maximize value for our stockholders. Our plans to achieve profitably also include continuing to develop new technologies into sustainable product lines that allow us to effectively compete to expand our customer base, execute our marketing and sales plans, and continue to improve our supply chain and organizational structure. We will also continue to review and pursue selected external funding sources.
the crisis. We continue to believemonitor the potential impact of the COVID-19 outbreak. This includes evaluating the impact on our customers, suppliers, and logistics providers as well as evaluating governmental actions being taken to curtail the spread of the virus. The significance of the impact on us is still uncertain; however, a material adverse effect on our customers, suppliers, or logistics providers could significantly impact our operating results. We also plan to continue to actively follow, assess and analyze the development of the COVID-19 pandemic and stand ready to adjust our organizational structure, strategies, plans and processes to respond to the impacts from the virus spread in the timeliest manner.
Nevertheless, during the first quarter of 2020 we continued to see benefits from the relaunch efforts, described in our 2019 Annual Report, undertaken in the last three quarters of 2019. It is our belief that the combinationcontinued momentum of the efforts undertaken in 2019, along with the launch of new and innovative products will over time result in improved sales and bottom-line performance for the Company. Our 2020 newly launched EnFocus™ platform has been receiving positive feedback from early customers. The EnFocus™ platform is launched with two immediately available product lines: EnFocus™ DM, which provides a dimmable lighting solution, and EnFocus™ DCT, which provides both a dimmable and color tunable lighting solution. . In addition, significant efforts undertaken to reduce costs and become more competitive in the Company’s MMM business segment offerings has positioned us to be more competitive in this business segment to win bids and proposals that have allowed us to generate additional business during the first quarter of 2020 as well as the balance of the year, offsetting some of the slowdown being experience on the commercial side of the business. While we continue to pursue growth on the commercial side of our plansbusiness due to obtainits potential and size, the MMM sector does offer us a steady opportunity for continued sales, profitability and market leadership despite its overall smaller market potential.
Meanwhile, the Company continues to seek additional external funding restructuring actions, current financial position, liquid resources, obligations due or anticipated withinalternatives and sources particularly since it has not yet achieved profitability. We plan to achieve profitability through executing on our multi-channel sales strategy that targets key verticals such as government, healthcare, education and commercial & industrial, complemented by our marketing outreach campaigns, channel partnerships, and new sales from an e-commerce platform, which we plan to formally launch in the next year, executive reorganization, development and implementationsecond quarter of an excess inventory2020. We also plan and implementation of our product development and sales channel strategy, if adequately executed, will provide us with an ability to finance our operations through 2020 and will mitigate the substantial doubt about our ability to continue asto develop advanced lighting and lighting control applications built upon the EnFocusTM platform. In addition, we intend to continue to apply rigorous and financial disciplines in our organizational structure, business processes and policies, and supply chain practices to help accelerate our path towards profitability.
At March 31, 2020, we had $2.9 million in cash, which excludes $0.3 million restricted cash held, and a going concern.total of $1.7 million in debt, including $0.8 million outstanding on our revolving credit facility, $0.9 million relating to our Iliad Note and we had $0.8 million in warrant liability following the January 2020 Equity Offering. Additionally, at March 31, 2020, we had $1.1 million of additional availability for us to borrow under the revolving line of credit facility.
Results of operations
The following table sets forth items in our Condensed Consolidated Statements of Operations as a percentage of net sales for the periods indicated:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Net sales | 100.0 | % | | 100.0 | % | | | | |
Cost of sales | 72.7 | | | 96.9 | | | | | |
Gross profit | 27.3 | | | 3.1 | | | | | |
| | | | | | | |
Operating expenses: | | | | | | | |
Product development | 7.5 | | | 16.6 | | | | | |
Selling, general, and administrative | 53.6 | | | 70.5 | | | | | |
Restructuring | (0.4) | | | 4.2 | | | | | |
Total operating expenses | 60.7 | | | 91.3 | | | | | |
Loss from operations | | (33.4) | | | (88.2) | | | | | |
| | | | | | | |
Other expenses (income): | | | | | | | |
Interest expense | 3.5 | | | 1.4 | | | | | |
Income from change in fair value of warrants | (23.1) | | | — | | | | | |
Other expenses | 0.5 | | | 0.6 | | | | | |
| | | | | | | | | |
Net loss | | (14.3) | % | | (90.2) | % | | | | |
|
| | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | 103.5 |
| | 74.9 |
| | 100.2 |
| | 78.5 |
|
Gross profit (loss) | (3.5 | ) | | 25.1 |
| | (0.2 | ) | | 21.5 |
|
| | | | | | | |
Operating expenses: | | | | | | | |
Product development | 10.3 |
| | 13.0 |
| | 13.5 |
| | 13.2 |
|
Selling, general, and administrative | 51.7 |
| | 46.8 |
| | 61.3 |
| | 51.6 |
|
Restructuring | 4.2 |
| | 0.1 |
| | 4.2 |
| | (0.5 | ) |
Total operating expenses | 66.2 |
| | 59.9 |
| | 79.0 |
| | 64.3 |
|
Loss from operations | (69.7 | ) | | (34.8 | ) | | (79.2 | ) | | (42.8 | ) |
| | | | | | | |
Other expenses (income): | | | | | | | |
Interest expense | 0.8 |
| | — |
| | 1.1 |
| | — |
|
Other expenses (income) | 2.6 |
| | — |
| | 1.6 |
| | (0.2 | ) |
| | | | | | | |
Net loss | (73.1 | )% | | (34.8 | )% | | (81.9 | )% | | (42.6 | )% |
Net sales
A further breakdown of our net sales is presented in the following table (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Commercial | $ | 1,736 | | | $ | 1,983 | | | | | |
MMM products | 2,047 | | | 1,194 | | | | | |
| | | | | | | |
Total net sales | $ | 3,783 | | | $ | 3,177 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Commercial products | $ | 2,131 |
| | $ | 2,972 |
| | $ | 4,114 |
| | $ | 5,177 |
|
Military products | 951 |
| | 2,200 |
| | 2,145 |
| | 4,654 |
|
Total net sales | $ | 3,082 |
| | $ | 5,172 |
| | $ | 6,259 |
| | $ | 9,831 |
|
Net sales of $3.1$3.8 million for the secondfirst quarter of 2020 increased compared to the first quarter of 2019 decreased 40.4 percent compared to the second quarter of 2018 primarily driven by a decreasean increase in militaryMMM product sales. Net sales of our commercial products decreased 28.3 percent in the secondfirst quarter of 2020 compared to the first quarter of 2019, compared to the second quarter of 2018, reflecting first,(i) lower sales from our agency network that we have been consolidating and deemphasizing for sales and marketing efforts since our restructuring in April 2019, and second,(ii) fluctuations in the timing, pace and size of commercial projects. Net sales of our military products decreased 56.8 percent in the second quarter of 2019 as compared to the second quarter of 2018, reflecting the timingprojects and fulfillment of U.S. Navy awards during the second quarter of 2018.
Net sales of $6.3 million for the first six months of 2019 decreased 36.3 percent compared to the same period in 2018 primarily driven by(iii) a decrease in military product sales. Net sales, of our commercial products decreased 20.5 percentcaused by delayed orders, have occurred mainly in the first six monthshealthcare and education industries because of 2019 comparedthe macroeconomic slowdown due to the same period in 2018, reflecting fluctuations in the timing, pace and size of commercial projects. Net sales of our military products decreased 53.9 percent in the first six months of 2019 compared to the same period in 2018. The sale cycles for the military market is dependent on many factors, including the availability of government funding, the timing and fulfillment of U.S. Navy awards, new ship construction and the timing of vessel maintenance schedules.COVID-19 pandemic.
Gross profit (loss)
Gross profit (loss) was $(0.1)$1.0 million, or (3.5) percent27.3% of net sales, for the secondfirst quarter of 2019,2020, compared to $1.3 million,$98 thousand, or 25.1 percent3.1% of net sales, for the secondfirst quarter of 2018. The 28.6 basis point decrease in gross margin percent in the second quarter of 2019 is primarily due to unfavorable inventory reserves as a percent of sales compared to the second quarter of 2018.2019. As a result of current manufacturing and sales volumes, gross margin for the secondfirst quarter of 20192020 included unfavorablefavorable warranty and inventory reserves of $0.5$91 thousand or 2.4% of net sales, offset by unfavorable outbound freight costs of approximately $80 thousand, or 2.1% of net sales. Gross margin for the first quarter of 2020 included unfavorable manufacturing variances and absorption of $0.3 million, or 14.7 percent7.2% of net sales, whereas gross margin for the secondfirst quarter of 2018 included unfavorable manufacturing and absorption of $0.3 million, or 5.6 percent of net sales.
Gross profit (loss) was $(11.0) thousand, or (0.2) percent of net sales, for the first six months of 2019 compared to $2.1 million, or 21.5 percent of net sales, for the first six months of 2018. The decrease is primarily related to unfavorable inventory reserves recorded during the first six months of 2019 of $0.4 million, or 6.8 percent of net sales. For the first six months of 2018, gross margin included unfavorable manufacturing variances and absorption of $0.6 million, or 5.7 percent of net sales, partially offset by net favorable excess inventory reserve adjustments of $0.4 million, or 4.0 percent11.8% of net sales.
Operating expenses
Product development
Product development expenses include salaries and related expenses, contractor and consulting fees, legal fees, supplies and materials, as well as overhead, such as depreciation and facility costs. Product development costs are expensed as they are incurred.
Product development expenses were $0.3 million for the secondfirst quarter of 2019,2020, a $0.4$0.2 million decrease compared to $0.7$0.5 million for the secondfirst quarter of 2018.2019. The decrease was primarily a result of lower product testing expenses due to the timing of new product introductions as well as lower salaries and related benefits due to the re-organizationelimination of two satellite research and re-alignmentdevelopment/engineering offices as part of the broader restructuring the Company that took placeundertook during the second quarter of 2019.
Product development expenses were $0.8 million for the first six months of 2019, a $0.5 million decrease compared to $1.3 million for the first six months of 2018. The decrease was primarily a result of lower product testing expenses, due to the timing of new product introductions as well as lower salaries and related benefits due to the re-organization and re-alignment of the Company that took place in the first half of 2019.
Selling, general andadministrative
Selling, general and administrative expenses were $1.6$2.0 million for the secondfirst quarter of 2019,2020, compared to $2.4$2.2 million for the secondfirst quarter of 2018.2019. The primary driversdriver of the decreased expenses were decreaseswas a decrease in stock-based compensation partly off-set by an increase in salaries and related benefits due to the lower headcount in 2019 and decreases in trade show and marketing expenses due to timing and efforts to reduce costs.our growth initiatives that expanded our staff, primarily in direct sales.
Selling, general and administrative expenses were $3.8 million for the first six months of 2019, compared to $5.1 million for the first six months of 2018. The $1.3 million decrease is the direct result of our decreases in salaries and related benefits of $0.7 million and decreases in sales commissions and legal expenses of $0.1 million. The lower expenses were partially offset by increased consulting expenses of $0.1 million in the first six months of 2019.
Restructuring
During the first half of 2019, we implemented phased actions to reduce costs in order to minimize cash usage while continuing to pursue strategic alternatives. The actions taken were limited to an initial phase while the options under strategic review were considered and evaluated, including the issuance of subordinated convertible notes as discussed in Note 7, “Debt,” included under Item 1 of the Quarterly Report.
Our initial actions included the elimination of twelve positions (three during the first quarter of 2019 and nine during the second quarter of 2019), costs associated with closing our offices in San Jose, California and Taipei, Taiwan during the first half of 2019, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including warehousing and marketing. In connection with these actions, we recorded severance and related benefits charges of $0.2 million during the six months ended June 30, 2019.
Our restructuring liabilities consist of estimated ongoing costs related to long-term operating lease obligations. The recorded value of the ongoing lease obligations is based on the remaining lease term and payment amount, discounted to present value. Changes in subsequent periods resulting from a revision to either the timing or the amount of estimated cash flows over the future period are measured using the credit adjusted, risk free rate that was used to measure the restructuring liabilities initially. Please also refer to Note 6, “Leases” as certain amounts formerly included below in the restructuring reserve as of December 31, 2018, have been reclassified on the balance sheet to be shown netted against the restructured lease, right-of-use asset in accordance with Topic 842.
For the sixthree months ended June 30, 2018,March 31, 2020, we recorded restructuring credits totaling approximately $0.05 million, primarily$14 thousand related to the revision of our initial estimates of the cost and offsetting sublease income for the remaining lease obligations for the former New York, New York and Arlington, Virginia offices.office. For additional information regarding the restructuring actions taken in the 2017 and 2019, please refer to Note 3, “Restructuring,” included under Item 8 of our 20182019 Annual Report.
While substantial doubt about our abilityDuring the three months ended March 31, 2019, we recorded severance and related benefits charges of $0.1 million.
Interest expense
Interest expense was $133 thousand for the first quarter of 2020, compared to continue asinterest expense of $43 thousand for the first quarter of 2019. The increase in interest expense of $90 thousand was a going concern continued to exist at June 30, 2019, the impactresult of increased amortization of the restructuring actions and initiatives described above, have reduceddebt financing costs in the first quarter of 2020. The actual cash interest paid in the first quarter of 2020 was $67 thousand compared to $21 thousand in the first quarter of 2019.
Income from change in fair value of warrants
Income of $0.9 million was recognized during the three months ended March 31, 2020 for the market value change in our operating expenses to be more commensurate with our sales volumes. Despite this, we continue to incur losses and havewarrant liabilities. The income recognized in the first quarter of 2020 was a substantial accumulated deficit, raising substantial doubt about our ability to continue as a going concernresult of the revaluation of the warrant liability using the market price of the Company’s stock at both DecemberMarch 31, 2018 and June 30, 2019. Considering both quantitative and qualitative information, we continue to believe that2020 versus the combinationmarket price of our plans to obtain additional external funding, restructuring actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive reorganization, development and implementationCompany’s stock at the time of an excess inventory plan, and implementationinitial issuance of our product development and sales channel strategy, if adequately executed, will provide us with an ability to finance our operations through 2020 and will mitigate the substantial doubt about our ability to continue as a going concern. Please refer to Note 7, “Debt,” included under Item 1 of this Quarterly Report for more information on the additional financing we received on March 29, 2019 to fund our near-term operations.warrants (January 13, 2020).
Other expenses (income)
Other expense was $79$18 thousand for the secondfirst quarter of 2019,2020, compared to other expense of $2 thousand for the second quarter of 2018. Other expense was $98 thousand for the six months ended June 30, 2019 compared to other income of $19 thousand for the six months ended June 30, 2018. Thefirst quarter of 2019. Other expenses in 2019 primarily consistedare mainly comprised of non-cash amortization of deferred financing costs related to the revolving credit facility we entered into on December 11, 2018. The income in 2018 related to the gain on the sale of equipment previously classified as held for sale.bank and collateral management fees.
Provision for income taxes
Due to the operating losses incurred during the three and six months ended June 30,March 31, 2020 and 2019, and 2018, and after application of the annual limitation set forth under Section 382 of the IRC, it was not necessary to record a provision for U.S. federal income tax or various states income taxes as income tax benefits are fully offset by a valuation allowance recorded.
Net loss
For the three months ended June 30, 2019,March 31, 2020, our net loss was $2.3$0.5 million, compared to $1.8$2.9 million for the three months ended June 30, 2018.March 31, 2019. The increasedecrease in the net loss was primarily driven by the lower product development, sales, general and administrative expenses and higher overall gross profit in the first quarter of 2019, partially offset by lower operating expenses,margins as previously discussed.
For the six months ended June 30, 2019, our net loss was $5.1 million, compared to $4.2 million for the six months ended June 30, 2018. The increase in net loss was primarily driven by the lower gross profit during the first half of 2019, partially offset by lower operating expenses as previously discussed.
Financial condition
While we had cash and cash equivalents of $2.2$2.9 million at June 30, 2019,March 31, 2020, which includesexcludes $0.3 million restricted cash held, we had a total of $3.4$1.7 million in debt, including $1.7$0.8 million outstanding on our revolving credit facility and $1.7$0.9 million relating to the Iliad Note and we had $0.8 million in subordinated convertible notes.warrant liability following the January 2020 Equity Offering. At March 31, 2020, we had $1.1 million of additional availability for us to borrow under the revolving line of credit facility. We have historically incurred substantial losses, and as of June 30, 2019,March 31, 2020, we had an accumulated deficit of $122.6$125.4 million. Additionally, our sales have been concentrated in a few major customers and for the sixthree months ended June 30, 2019,March 31, 2020, two customers accounted for approximately 17 percent and 28 percent53% of net sales.
As a result of the restructuring actions and initiatives described above, we have reduced our operating expenses to be more commensurate with our sales volumes, however,volumes. However, we continue to incur losses and have a substantial accumulated deficit, and
substantial doubt about our ability to continue as a going concern continues to exist at June 30, 2019.March 31, 2020.
Since the executive transition on April 1, 2019, we have continued to evaluate and assess strategic options as we seek to achieve a profitable business model and maximize value for our stockholders. Our plansprofitability. We plan to achieve profitability includethrough growing our sales by continuing to develop new technologies into sustainable product linesexecute on our multi-channel sales strategy that allow us to effectively compete to expand our customer base, executetargets key verticals such as government, healthcare, education and commercial and industrial, complemented by our marketing outreach campaigns, channel partnerships, and additional sales plans, andfrom a new e-commerce platform, which we plan to launch in the second quarter of 2020. We also plan to continue to improvedevelop advanced lighting and lighting control technologies and introduce impactful new products such as the EnFocus™, a breakthrough lighting control platform we officially launched during the second quarter of 2020. In addition, we continue to apply rigorous and financial disciplines in our organizational structure, business processes and policies, and supply chain practices to help accelerate our path towards profitability.
As described in Note 9, we also raised approximately $2.3 million of net proceeds upon the issuance of common stock and organizational structure. warrants under the January 2020 Equity Offering
The restructuring and cost cutting initiatives implemented during 2017 and 2019 as well as the January 2020 equity offering that significantly strengthened our balance sheet were designed to allow us to effectively execute this strategy; however,these strategies. However, our efforts may not occur as quickly as we envision or be successful, due to the long sales cycle in our industry, the corresponding time required to ramp up sales from new products and markets into this sales cycle, the timing of introductions of additional new products, significant competition, and potential sales volatility given our customer concentration, and the recent and lingering economic impact from COVID-19 pandemic, among other factors. As a result, we will continue to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines required to achieve these objectives including, but not limited to, the following:
•obtaining financing from traditional or non-traditional investment capital organizations or individuals; and
•obtaining funding from the sale of our common stock or other equity or debt instruments.instruments; and
•obtaining debt financing with lending terms that more closely match our business model and capital needs.
There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining
additional funding contains risks, including:
•additional equity financing may not be available to us on satisfactory terms and any equity we are able to issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to our common stock;
•loans or other debt instruments may have terms and/or conditions, such as interest rate, conversion price, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors; and
•the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.
If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional external funding restructuring, timely reorganizational actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive reorganization, development and implementation of an excess inventory reduction plan, application and implementationsuccessful acquisition of a Payroll Protection Plan (“PPP”) loan during April 2020, plans and initiatives in our R&D, product development and sales and marketing, development of potential channel strategy,partnerships, if adequately executed, will provide us with an ability to finance our operations through 2020the next twelve months and will mitigate the substantial doubt about our ability to continue as a going concern.
On May 15, 2019, we received a letter from the Nasdaq Stock Market (“NASDAQ”) advising us that for 30 consecutive trading days preceding the date of the letter, the bid price of our common stock had closed below the $1.00 per share minimum required for continued listing on NASDAQ pursuant to listing rules. Therefore we could be subject to delisting if we did not regain compliance within the compliance period or extend the compliance period by filing for an extension. On October 15, 2019, the Company formally requested a 180-day extension beginning November 12, 2019 and is evaluating options to regain compliance.
On April 16, 2020, NASDAQ announced that, in response to the COVID-19 pandemic and related extraordinary market conditions, it is providing temporary relief through June 30, 2020 from, among other rules, the $1.00 minimum bid price rule. As a result, Energy Focus has until July 24, 2020 to come into compliance with the $1.00 minimum bid price rule. Energy Focus is evaluating its options to come into compliance, including, in the discretion of its board of directors, effectuating a reverse stock split of its common stock at a ratio of at least 1-for-2 and up to 1-for-20, which discretionary reverse stock split has been approved by Energy Focus’ stockholders, provided it occurs no later than June 17, 2020.
Subsequent to quarter-end on April 17, 2020, the Company was granted a loan from KeyBank National Association in the amount of approximately $795 thousand, pursuant to the Paycheck Protection Program (the “PPP”) under Division A of the Coronavirus Aid, Relief and Economic Securities Act (the "CARES Act"), which was enacted on March 27, 2020. The loan accrues interest at a rate of 1.0% per annum and matures on April 17, 2022. The funds were received on April 20, 2020. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company intends to use the entire loan amount for qualifying expenses and hence at this time the Company expects the loan will be forgiven. However, there is no assurance that the Company will obtain forgiveness for any portion of the loan.
Liquidity andcapitalresources
Cash and cash equivalents
At June 30, 2019,March 31, 2020, our cash and cash equivalents balance was approximately $2.2$2.9 million, compared to approximately $6.3$0.4 million at December 31, 2018.2019. The balance at June 30, 2019March 31, 2020 and December 31, 2018 included2019 excluded restricted cash of $0.3 million for a letter of credit requirement under a lease obligation.
The following summarizes cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, | | |
| 2020 | | 2019 |
Net cash provided by (used in) operating activities | $ | 504 | | | $ | (3,556) | |
| | | |
Net cash used in investing activities | $ | (47) | | | $ | (4) | |
| | | |
Net cash provided by financing activities | $ | 2,104 | | | $ | 1,086 | |
|
| | | | | | | |
| Six months ended June 30, |
| 2019 | | 2018 |
Net cash used in operating activities | $ | (5,120 | ) | | $ | (2,300 | ) |
| | | |
Net cash (used in) provided by investing activities | $ | (28 | ) | | $ | 183 |
|
| | | |
Net cash provided by (used in) financing activities | $ | 1,015 |
| | $ | (18 | ) |
Net cash used inprovided by (used in) operating activities
Net cash provided by operating activities was $0.5 million for the three months ended March 31, 2020. The net loss was $0.5 million and was adjusted for non-cash items, including: depreciation and amortization, stock-based compensation, change in fair value of warrant liabilities, provisions for inventory, warranty reserves and working capital changes. The primary driver for a positive operating cash flow was the generation of $1.5 million cash from the utilization of existing inventory stock as opposed to new purchases. During the three months ended March 31, 2020, we used $0.2 million in cash for accounts payable, primarily due to the timing of inventory receipts and we used $0.2 million of prepaid and other assets due to prepaid deposits to our contract manufacturers for inventory for the new EnFocus™ platform. We generated cash of $0.4 million through the collection of accounts receivable and $0.2 million through a decrease of other accrued liabilities, primarily related to accrued payroll and benefits and commissions. Cash generated was partially offset by an adjustment of $0.9 million for change in fair value of warrants.
For the three months ended March 31, 2019, net cash used in operating activities was $5.1$3.6 million, for the six months ended June 30, 2019, and resulted primarily from the net loss incurred of $5.1$2.9 million, adjusted for non-cash items, including: depreciation, stock-based compensation, and provisions for inventory and warranty reserves, and working capital changes. During the sixthree months ended June 30,March 31, 2019, we used $1.5$1.3 million in cash for accounts payable, primarily due to the timing of inventory receipts and payments, and $0.4$0.2 million through a decreasean increase in accounts receivable, due to the higher shipments in the first half ofMarch 2019 as compared to December 2018. In addition, prepaid and other assets decreased by $0.4$0.5 million as the inventory for which we paid deposits to our contract manufacturers in prior quarters was received in the first quarter of 2019.
Net cash used in operating activities was $2.3 million for the six months ended June 30, 2018, and resulted primarily from the net loss incurred of $4.2 million, adjusted for non-cash items, including: depreciation, stock-based compensation, provisions for inventory and warranty reserves and working capital changes. During the six months ended June 30, 2018, we generated cash of $1.5 million through an increase in accounts payable, due to our payment terms with our vendors; $0.4 million through reduction in our inventory, due to the volume and timing of inventory receipts; and $0.2 million through the collection of accounts receivable, due to the timing and volume of our shipments in December 2017 compared to June 2018. Partially offsetting these increases in cash was an increase in prepaid and other assets of $0.4 million, related to deposits paid to our contract manufacturers on inventory to be shipped in subsequent quarters.
Net cash (used in) provided by investing activities
Net cash used in investing activities was $28$47 thousand for the sixthree months ended June 30, 2019,March 31, 2020 and resulted primarily from the purchase of tooling to support production operations. Net
For the three months ended March 31, 2019, net cash provided byused in investing activities was $0.2 million for the six months ended June 30, 2018,$4 thousand, and resulted primarily from the salepurchase of certain equipment previously classified as held for sale, partially offset by purchases of computer equipment, equipmenttooling to support production operations and leasehold improvements.operations.
Net cash provided by (used in) financing activities
Net cash provided by financing activities during the sixthree months ended June 30,March 31, 2020 was $2.1 million, primarily resulting from the $2.8 million in proceeds received from the share issuance in January 2020, partially offset by $0.5 million in offering costs for the issuance and an issuance related mandatory repayment of the Iliad note of which $0.2 million was allocated against principal. At March 31, 2020, we had $1.1 million of additional availability for us to borrow under the Credit Facility.
Net cash provided by financing activities during the three months ended March 31, 2019 was $1.0$1.1 million, primarily resulting from the $1.7 million in proceeds we received for the subordinated convertible notes we entered into on March 29, 2019, partially offset by net repayments of $0.6$0.5 million on borrowings under the credit facility we entered into on December 11, 2018. In addition, we used approximately $0.1 million to issue and immediately repurchase our stock for employee tax withholding related to restricted stock unit vesting during the period. Net cash used in financing activities during the six months ended June 30, 2018 was $18 thousand, resulting from issuing and immediately repurchasing our stock for employee tax withholding related to restricted stock unit vesting.
Contractual obligations
As of June 30, 2019,March 31, 2020, we had approximately $0.9$3.4 million in outstanding purchase commitments for inventory. Of this amount, approximately $0.6$2.5 million is expected to ship in the thirdsecond quarter of 20192020 with the balance expected to ship in the third and fourth quarter of 2019 and the first quarterquarters of 2020.
There have been no other material changes to our contractual obligations as compared to those included in our 20182019 Annual Report.
Critical accounting policies
LeasesFair value of warrant liabilities
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the current lease accounting requirements. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which simplifies adoptionThe estimated fair value of Topic 842 by allowing an additional transition method that will not require restatement of prior periods and providingwarrants accounted for as liabilities, representing a new practical expedient for lessors to avoid separating lease and non-lease components within a contract if certain criteria are met (provisions of which must be elected upon adoption of Topic 842). The new standard requires a lessee to recordlevel 3 fair value measure, was determined on the balance sheetissuance date and subsequently marked to market at each financial reporting date. We use the assets andBlack-Scholes valuation model to value the warrant liabilities for the rights and obligations created by leases with lease terms of more than 12 months. It also requires lessees to disclose certain key information about lease transactions. Upon implementation, an entity’s lease payment obligations will be recognized at theirfair value. The fair value is estimated present value along with a corresponding right-of-use asset. Lease expense recognition will be generally consistent with current practice.
The Company adopted this guidance as of January 1, 2019 using the required modified retrospective method with the non-comparative transition option. The Company applied the transitional package of practical expedients allowed by the standard to not reassess the identification, classification and initial direct costs of leases commencing before this ASU’s effective date. The Company also applied the lease term and impairment hindsight transitional practical expedients. The Company has chosen to apply the following accounting policy practical expedients: to not separate lease and non-lease components to new leases as well as existing leases through transition; and the election to not apply recognition requirements of the guidance to short-term leases.
The results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with legacy generally accepted accounting principles.
On adoption, we recognized additional operating lease liabilities of approximately $2.9 million, with corresponding right-of-use assetsexpected volatility based on the present value of the remaining minimum rental payments under prior leasing standards for our existing operating leases. The operating lease right-of-use assets recorded upon adoption were offset by the carrying value of liabilities previously recorded under Topic 420historical volatility and impairment charges totaling $273 thousand and $186 thousand, respectively.is determined using probability weighted-average assumptions, when appropriate.
Please refer to Note 6, “Leases,” included under Part I, Item 1 of this Quarterly Report for more information relating to the Company’s leasing arrangements.
There have been no other material changes to our critical accounting policies as compared to those included in our 20182019 Annual Report.Report on Form 10-K for the year ended December 31, 2019.
Certain risks and concentrations
We had certain customers whose net sales individually represented 10 percent or more of our total net sales, or whose net trade accounts receivable balance individually represented 10 percent or more of our total net trade accounts receivable, as follows:
For the three months ended June 30, 2019,March 31, 2020, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company located in Texas accounted for approximately 13 percent38% and 26 percent15% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuildershipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 20 percent46% of net sales for the same period. For the three months ended June 30, 2018,March 31, 2019, sales to our primary distributor for the U.S. Navy a global healthcare provider located in Northeast Ohio, and a regional commercial lighting retrofit company located in Texas accounted for approximately 29 percent, 15 percent22% and 11 percent30% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuildershipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 33 percent32% of net sales for the same period.
For the six months ended June 30, 2019, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company located in Texas accounted for approximately 17 percent and 28 percent of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuilder for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 26 percent of net sales for the same period. For the six months ended June 30, 2018, sales to our primary distributor for the U.S. Navy and a global healthcare provider located in Northeast Ohio accounted for approximately 37 percent and 12 percent of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuilder for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 41 percent of net sales for the same period.
A regional commercial lighting retrofit company located in Texas and our primary distributor for the U.S. Navy accounted for approximately 26 percent12% and 13 percent44% of net trade accounts receivable, respectively, at June 30, 2019.March 31, 2020. At December 31, 2018,2019, our primary distributor for the U.S. Navy accounted for approximately 40 percent10% of net trade accounts receivable and a large regional retrofit company accounted for 41.0% of our net trade accounts receivable.
Recent accounting pronouncements
For information on recent accounting pronouncements, please refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” included under Part I, Item 1 of this Quarterly Report.
ITEM 3. QUANTATATIVEQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the company is not required to provide information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b) under the Exchange Act, our management must evaluate, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as of June 30, 2019,March 31, 2020, the end of the period covered by this report. Mr. James Tu, our current Chief Executive Officer, joined our board of directors on April 1, 2019 and became our Chief Executive officer on April 2, 2019. Mr. Tod A. Nestor, our current Chief Financial Officer, assumed that role on July 1, 2019. While our current Chief Financial Officer was not serving in such position as of June 30, 2019, management,Management, with the participation of our current Chief Executive Officer and Chief Financial Officer, did evaluate the effectiveness of our disclosure controls and procedures as of the end of period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of the end of the period covered by this report due to the material weakness in our internal control over financial reporting discussed below.
As previously disclosed in our quarterly report on Form 10-Q for the quarterly period ended March 31, 2019, we determined that we had a material weakness in our internal control over financial reporting primarily due to segregation of duties due to low staffing levels in the finance function that lead to the lack of sufficient levels of proper supervision and review by employees for non-routine accounting and related financial reporting matters. Such a conclusion reflects, in part, the departure of the Company’s previous Chief Financial Officer and Chief Executive Officer with signed agreements on March 29, 2019 that were effective April 1, 2019. In addition, the Company’s full-time Controller departed the Company on July 5, 2019. Until we are able to remedy our material weakness, we are relying on the assistance of third-party consultants to assist with accounting for non-routine transactions and certain financial reporting matters.2020.
However, this material weakness does have compensating controls in the form of:
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| | |
| • | an independent audit committee of our board of directors; |
| • | use of external consultants to assist with financial reporting; |
| • | detailed written documentation of our internal control policies and procedures; and |
| • | a Code of Business Conduct and Ethics and a whistleblower policy. |
We have taken steps to enhance our internal control over financial reporting and plan to take additional steps to remediate the material weakness. Specifically:
As mentioned, as of July 1, 2019, we hired our new Chief Financial Officer and President, Tod A. Nestor, a licensed CPA, CMA, CFM, and CFA, and thirteen-year CFO, as well as former public company CFO who will focus on the development of the finance and accounting function. Mr. Nestor replaces the interim CFO role the CEO was fulfilling.
We plan to appoint additional qualified personnel to address inadequate segregation of duties. The Company continues to evaluate the organizational structure of the finance organization to identify the current gaps in the structure to meet the Company’s reporting needs, and expects to hire, retain, and develop the necessary talent to remediate the current material weakness deficiency. Ultimately, it is expected that internal employees will replace the consultants currently being used as an interim solution to assist in financial reporting. A key deliverable for our new CFO is to share a staffing plan with the Audit Committee during the second half of our 2019 fiscal year.
We expect to hire a full-time Controller with a CPA as a replacement for the departed Controller.
When necessary, we expect to outsource and seek guidance on complex U.S. GAAP-related issues from outside parties until an internal technical expert is hired on a full-time basis.
Management is aware of the risks associated with the lack of segregation of duties due to the small number of employees currently working with general administrative and financial matters. Due to the Company’s size and nature, segregation of all conflicting duties may not always be possible and may not be currently economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions shall be performed by separate individuals. In addition, the Company will closely review all cash receipts and disbursements to insure an adequate control environment until more qualified resources can be added to the finance team.
The remediation efforts set out herein will continue to be implemented in our 2019 fiscal year. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected.
Changes in internal control over financial reporting
During the quarterly period covered by this report, there have not been any changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting apart from the aforementioned changes in personnel.reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of June 30, 2019,March 31, 2020, we were not involved in any material legal proceedings.
ITEM 1A. RISK FACTORS
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the company is not required to provide information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFUALTSDEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
EXHIBIT INDEX
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Exhibit Number | Description of Documents |
| |
Exhibit
Number 3.1 | Description of Documents |
| |
3.1 | |
| |
3.2 | | |
| |
3.23.3 | | |
| |
3.4 | | |
| |
3.5 | | |
| |
3.33.6 | | |
3.4 | |
3.7 | | |
| |
3.8 | | |
3.5 | |
3.9 | | |
3.6 | |
3.10 | | |
3.7 | |
3.11 | | |
| |
10.13.12 | | PresidentCertificate of Ownership and Chief Financial Officer Offer Letter dated June 18, 2019 between Tod A. Nestor andMerger, Merging Energy Focus, Inc., a Delaware corporation, into Fiberstars, Inc., a Delaware corporation, filed with the Secretary of State of the State of Delaware on May 4, 2007 (incorporated by reference to Exhibit 10.13.1 to the Registrant’s Quarterly Report on Form 10-Q filed on July 22, 2019)May 10, 2007). |
10.2 | |
4.1 | | |
10.3 | |
4.2 | | |
10.4 | |
10.1 | | |
10.5 | |
10.2 | | |
| |
31.1 | | |
| |
31.2 | | |
| |
| | | | | |
32.1 + | | |
| |
*101 | The following financial information from our Quarterly Report for the quarter ended June 30, 2019,March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at June 30, 2019March 31, 2020 and December 31, 2018,2019, (ii) Condensed Consolidated Statements of Operations for the three and six months ended June 30,March 31, 2020 and 2019, and 2018, (iii) Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2019 and 2018, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2019, (v)March 31, 2020, (iv) Condensed Consolidated Statements of Cash Flows for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, and (vi)(v) the Notes to Condensed Consolidated Financial Statements. |
| |
*104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | | ENERGY FOCUS, INC. |
| | | |
Date: | May 13, 2020 | By: | /s/ James Tu |
| | | James Tu |
| | | Executive Chairman and Chief Executive Officer |
| | | Principal Executive Officer |
| | | | | | | | | | | |
| | | |
Date: | May 13, 2020 | By: | ENERGY FOCUS, INC. |
| | | |
Date: | September 13, 2019 | By: | /s/ James Tu |
| | | James Tu |
| | | Chairman and Chief Executive Officer |
Tod A. Nestor |
| | | |
| | | |
| | By: | /s/ Tod A. Nestor |
| | | Tod A. Nestor |
| | | President, Chief Financial Officer and Secretary |
| | | Principal Financial and Accounting Officer |